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us stock market, trend trading stock
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7/17/03 Investment House Daily
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Investment House Daily Subscribers:
MARKET ALERTS:
Target hit alerts issued Thursday: None issued
Buy alerts issued: None issued
Trailing stop alerts: AVID; LWSN
Stop alerts: AGIL; ALT; KEM; BRCM
The market alert service is a premium level service where we issue intraday alerts relating to the general market conditions, when stocks hit action points (buy, stop, target, etc.), and when we see other information impacting the market or our stocks. To subscribe to the Daily alert service you can sign up at the following link:
http://www.investmenthouse.com/alertdly.htm
SUMMARY:
- Technology whipping day, but large caps steady as a rock.
- Jobless numbers better, Philly Fed sharply higher as economic numbers pick up speed.
- Despite the red, indexes holding near support and on lighter volume.
- Subscriber Questions
Techs see red as the short term picture was ugly, but the longer term look remains positive.
IBM and other tech earnings forecast the action in the pre-market, and it was an accurate forecast. Techs opened lower and pretty much got lower all day as one name after another was taken apart for earnings reasons. Specific stories and disappointments resulted in severe blood-letting in those issues. Nasdaq stocks in general took a beating as well with the A/D line -4:1 with Nasdaq closing down 2.9%. On the other hand, though selling was broad across the market, outside technology most of the selling was rather mild. DJ30 for example was down just 0.5% as cyclicals performed quite well.
Indeed overall volume was lighter on both NYSE and Nasdaq. Thus despite the rather imposing point drops in some Nasdaq stocks, the action was generally not distributive as SP500, DJ30 and even Nasdaq held support. Certainly individual issues were slammed on high volume, but the market overall remained relatively steady in its consolidation of the recent run.
Given the again rather decent economic data with jobless claims falling ever closer to that 400K level and more importantly the Philly Fed showing yet another regional economy expanding much better than expected, the current selling episode takes on its proper perspective. There was a big run up right into earnings with Nasdaq making 150 points in 5 sessions where it was taking it 3 to 4 weeks to cover that ground before. That move was on top of an already solid sprint from the March low with no real rest. The economy is showing improvement in the places it should be showing improvement for a recovery to take hold, and stocks have been pricing that in, not he current earnings reports. Thus, this selling is a not an overall failure of the market that is the prelude to the next crash; it is a near term correction from the sharp rally higher in an otherwise improving economic picture. We were watching the SOX to see if it could step up and support another move higher; it was simply not time for it to do so and now stocks are peeling back and taking another rest.
THE ECONOMY
Jobless claims fall to 412K.
All morning we heard how jobless claims had come in lower than expectations and what a positive that was for the economy. We still have a hard time seeing claims over 400K as a real positive. Further, the weekly variations are so small and are revised to such an extent that these fluctuations mean little. Overall the trend is the same: job losses are slowing but they are not reversing.
That is typical. We heard the 'bull/bear' debate on the television about the significance of the number. Economic bulls stated the lower number indicated recovery was underway (flawed logic as they are applying a standard of accuracy that the report cannot deliver). The bears cited claims by companies such as Manpower (temporary staffing) that they are seeing no increase in demand as proof the economy is not improving. Both are trying to make too much of the data and are misinterpreting or are misinformed about the stages of economic recovery. The bulls are wrong because the number does not show recovery in the employment market. The bears are wrong because an economic recovery hits about every economic sector first before it gets to employment. To say that there is no recovery because employment agencies are seeing no pickup in business is akin to denying a category 5 hurricane 200 miles of the coast is coming simply because the sky is blue today. At best the argument can be made that the job market has stabilized. At worst the data show that there is no improvement in the job market. That is all the data tells us.
We have noticed a number of stories of late questioning the job market with headlines such as 'Will the job market ever improve?' These discuss how things have changed and there won't be as many jobs in the future or how the economy is just going to limp along indefinitely. Last recession the unemployment rate did not peak until 15 months into the recovery. We are supposedly at 17 months now. Headlines tend to be a step or two behind reality. When they start to question something in bold headlines that typically means the change is at hand.
Philly Fed
The NY PMI was better than expected and now the Philly Fed posted yet again good numbers at 8.3 versus the 7.0 expected and 4.0 in June. The regional reports continue to improve, particularly in key areas. The national average lags those, but we can expect to see the national ISM show expansion over the next couple of months. The ISM Service index is sharply stronger already. These are the precursors to an expanding job market down the road where the quality of jobs improves as well. Not there yet, but the market was looking at all of this back in October and started pricing in the recovery. Every time there is a dip in an economic report or the market, the question arises as to just what condition the economy is in. There are some promising reports but others are weak. It is in these uncertain times that stocks start to rally; they move well before the issue is settled, and from what we hear on the financial stations and from the average person on the street, there is still a lot of uncertainty about the economic recovery, and that leaves more upside for stocks.
Housing starts climb again.
June starts rose 3.7% (1.803M annual units) while permits also logged an impressive gain to 1.817M. These results easily outpaced projections of 1.750M for houses and 1.780 for permits (a slight drop forecast). It will be interesting to see how well these numbers hold up in July with mortgage rates swinging sharply higher as the 10 year treasury bolted from just over 3% to 3.93% in two weeks.
By the way, the recession is over.
The National Bureau of Economic Research proclaimed the recession ended in November 2001. Man do we feel better. We were foolishly under the impression, no doubt from our day to day activities of living, that the economy was very, very weak in all of 2002 basically up to now. Maybe not a textbook definition of a recession, but when compared to where we were before the Fed's snipe hunt against inflation (which will go down in history as one of the biggest central bank boondoggles of all time), the economy still very much feels as if it is in recession.
THE MARKET
The market was down without question, and the leading technology and small cap indexes bore the brunt of the damage. They had, of course, reaped the most benefit from the run higher. At the same time the laggards, the SP500 and DJ30, which remained mired in their lateral moves below the recent highs, continued on Thursday as if nothing had changed. What had changed was that the large cap cyclical stocks started to perform and pick up the slack of the falling tech stocks. Rotation is not only good for your auto tires, it is a hallmark of a healthier market. Money moved out of tech and into stocks such as UTX and CAT. It was not enough to move the indexes higher, but it was enough to keep them in their current consolidation without a breakdown, even with IBM plunging 3.41 points.
Techs were not ready to advance further after running to 24% over their 200 day MVA as a whole. The SOX was poised to provide support for another sprint higher, but it was not time. Indeed, the pullback here as opposed to taking on another 5% or more to Nasdaq is much better long term action. Taking out some of the froth once again at this level above the 200 day allows stocks to come back and test the 50 day MVA and set up the next move, and it takes the pressure off of a larger and more violent correction as stocks head into late August and September.
When you cut through the fear and hype surrounding the action Thursday, you see a decent picture. Stock have rallied in anticipation of a better economy, economic data is showing the same historical path of recovery that marked previous economic upturns, earning have improved quarter over quarter and year over year (and the numbers are squeaky clean now), the market has leadership, and the market is not suffering any heavy distribution. It needed rest but was trying to push ahead anyway. That move failed and now it is testing near support and consolidating for the next move.
Market Sentiment
VIX: 22.82; +0.53
VXN: 35.47; +1.48
Put/Call Ratio (CBOE): 0.89; +0.19. Surging again toward the levels that have sparked rebounds in the market during the current run since March.
Nasdaq
Received the hammer blows Thursday, gapping down and falling all session. Managed a late bounce to hold the 18 day MVA on lighter volume.
Stats: -49.95 points (-2.86%) to close at 1698.02
Volume: 1.917B (-0.9%). Volume was still average, but it was lower on the selling. Given a 2.9% whacking you would expect to see more relative volume. It was not there, indicating there was not widespread share dumping.
Up Volume: 175M (-550M)
Down Volume: 1.729B (+544M)
A/D and Hi/Lo: Decliners led 3.89 to 1. Serious negative breadth. Now while we have noted the swing to negative breadth, it has also reach very high levels. We noted these high levels back in September and October of 2002 an indication that the bottom was forming. When breadth levels get extreme, that is a positive for the upside. Getting closer to extreme in a hurry.
Previous Session: Decliners led 1.33 to 1
New Highs: 117 (-118)
New Lows: 10 (+7)
The Chart: http://www.investmenthouse.com/cd/$compq.html
Gapped lower this time after three gaps higher failed. The index was never strong and it spent the last half of the session trading around support at the 18 day MVA (1697) and 1700. After zooming higher to start the month in what looks like a near term exhaustion run, the index is starting to give that move back. Volume has overall been stronger the past three sessions as the index tried to gap past 1750 but failed to hold the move and started to sell. It is now right over the June highs (1685) that are some support. There is a lot of downside momentum heading into Friday, but MSFT posted some nice earnings and most importantly, raised guidance on both the top and bottom lines for the next quarter and 2004. MSFT is conservative, and when it raises guidance it is taken as a sure bet. That could spart another run attempt, but the index needs some more consolidation around this level as opposed to another jump right back up.
S&P 500/NYSE
The large caps fell through the 18 day MVA, but are still above the prior low in the range.
Stats: -12.36 points (-1.23%) to close at 981.73
NYSE Volume: 1.652B (-0.18%). Small caps and large caps were selling, but volume contracted slightly. This indicates that though the selling was broad, big money was not dumping stocks in general.
Up Volume: 338M (-145M)
Down Volume: 1.303B (+154M)
A/D and Hi/Lo: Decliners led 3.31 to 1. Again some heavy downside breadth as the smaller cap issues were really knocked around as money moved to the larger cap cyclical stocks Thursday.
Previous Session: Decliners led 2.2 to 1
New Highs: 45 (-57)
New Lows: 25 (+7)
The Chart: http://www.investmenthouse.com/cd/$spx.html
The large caps did not hold the nearest support (18 day MVA), slipping down toward 975 that marks the bottom of the range as set by the June lows. The recent twin peaks brings to mind a double top pattern, the result of SP500 trying to break up a short term head and shoulders pattern and partly succeeding. It could not make the breakout, however, and now is going to test the bottom of the range and the 50 day MVA (970). Thus far the index is not suffering any worse than it has during this lateral move, but all eyes are on how it holds the range and whether this double top sends it lower toward next support at 950.
DJ30:
Stats: -43.77 points (-0.48%) to close at 9050.82
Volume: 1.652B (-0.18%)
Performed the best of the major indexes, holding above near support at 9000 (9018 on the low) and rebounding some to the close. Volume was much lower even with IBM selling off. DJ30 made a lower high, typically a more bearish action, but the lateral consolidation since mid-June has been rather orderly and boring, and that is what it should be. Near support is 9000 with the 50 day MVA next at 8939. DJ30 should hold above those levels and move laterally to keep the consolidation moving along.
FRIDAY
The market has another earnings report to chew on with MSFT able to stoke some after hours trading with some decent guidance. Thus far good earnings have been expected and only those reporting them have benefited. The market has pulled back some on the announcements, and while MSFT could spark another upside run we don't think stocks in general are ready. After some torrid runs many leaders are back at their 18 day MVA in a rapid move lower. If the pullback was a bit slower we would look for a quick bounce. Given the thud lower there was some damage done that needs some time. The overall market could use more time to consolidate the moves and get back into the pattern of lateral moves to digest gains giving way to breaks higher.
That is what it needs but whether it waits remains to be seen. The action to the downside is turning out as quick as the Nasdaq upside move was to start the month. That shows some of the exhaustion of the market as the sudden run higher is suddenly given up. That also indicates the need for DJ30 and SP500 to continue doing just what they are doing, i.e., holding near support and moving laterally.
That action does not set up the best near term opportunities. There are stocks scattered across the sectors that are still in good shape in their patterns as they have not become overly extended and have not thus been slammed lower in some quick profit taking. We will keep an eye on those for breakout moves even as the rest of the market tries to sleep off that early July run higher. As for the downside, stocks have just exploded higher and have given that move back to the near term support. They are not set up for the high percentage downside moves we like to participate in. If the consolidation breaks down they will be popping up, but at this juncture we don't want to get too carried away to the downside; if the market continues to consolidate laterally, the action won't be enough to make us easy money. There are a few that look ripe, however, and we will be exploring those.
In sum we will be watching for the opportunity that is there even with the pullback and we will also be maintaining positions. We exited several plays that were breaking support or otherwise performing less than expected, but many stocks tested support and the stop points only to bounce up some or otherwise hold support. We let those stand given that the indexes were still holding support.
Support and Resistance
Nasdaq: Closed at 1698.02
Resistance: 1760 (May 2002). 1800.
Support: 1700 (Feb 2002 low). The 18 day MVA (1697). 1685 (June intraday high). 1646, the early June high. The exponential 50 day MVA (1622). 1600 to 1595 (June 2002 closing high). The mid-May high (1554).
S&P 500: Closed at 981.73
Resistance: The 18 day MVA (992). 1003, the early June closing high. June closing high at 1011. The June intraday high at 1015. Then 1050.
Support: 975 (December 1997 peak). The 50 day MVA (970) and 965 (August 2002 peak). The mid-May high (948) and 935 (November and January peaks).
Dow: Closed at 9050.82
Resistance: The 18 day MVA (9105). 9236, the early June intraday high to 9250. 9352, the June high. 9500 (June 2002 lows).
Support: 9000 is some psychological and price support that has held previously. 8980 is the neckline in the short head and shoulders pattern. The 50 day MVA (8939). January high (8870). The mid-May high at 8743
Economic Calendar
7-15-03
NY Empire State PMI, July (8:00): 22.6 actual, 20.0 expected, 27.6 June (revosed from 26.8).
Retail sales, June (8:30): 0.5% actual, 0.4% expected, 0.0% May (revised from 0.1%).
Ex autos (8:30): 0.7% actual, 0.3% expected, 0.1% May.
7-16-03
CPI, June (8:30): 0.2% actual, 0.2% expected, 0.0% May.
Core CPI (8:30): 0.0% actual, 0.1% expected, 0.3% May.
Business inventories, May (8:30): -0.2% actual, 0.0% expected, 0.0% April
Industrial production, June (9:15): 0.1% actual, 0.1% expected, 0.1% May.
Capacity utilization, June (9:15): 74.3% actual, 74.3% expected, 74.3% May.
7-17-03
Housing starts, June (8:30): 1.803M actual, 1.750M expected, 1.738M May.
Building permits, June (8:30): 1.817M actual, 1.790M expected, 1.803M May.
Initial jobless claims (8:30): 412K actual, 425K expected, 441K prior (revised from 439K).
Philly Fed, July, (12:00): 8.3 actual, 7.0 expected, 4.0 June.
7-18-03
Preliminary Michigan sentiment, July (9:45): 91.0 expected, 89.7 prior.
SUBSCRIBER QUESTIONS
Q: I have been in the market for just over 3 years. I have subscribed to your service always found it extremely astute and to the point. Most recently I have been following your IH Alerts and found them very profitable. Since May I have added options to my repertoire and found them excellent leveraging tools. But I find them difficult to trade because of the low volume especially when the market is in a distribution mode like today. Do you actually sell your options at the same time you sell the underlying stock in a stop loss situation? Sometimes we're selling with just a few moments left in the trading day...... Do you have any suggestions?
A: Very timely. As the option action is driven by the underlying stock action we typically use that as our guide to when we buy and sell option positions. When volume is low for a certain option that makes it very difficult to sell with a stop loss set in the system. Market makers for options are notorious for shifting the bid and ask around when there is an order in the system. It is much more susceptible to 'irregularities.' When dealing with less liquid option positions, stop losses (we prefer stop limits) are often jumped over leaving you in the option (if you use a stop limit). When dealing with options with lower open interest (typically below 100), you have to be ready to take what the market maker is offering to get the trade done and move on. If you try to shave the spread you most likely won't get the trade. We are often in lower open interest options and we know that when we get ready to exit we will have to meet the bid right on to get taken out.
SEMINARS ON CD
http://www.stockseminarsonline.com
This is Jon Johnson's own site devoted exclusively to seminars designed to teach you what you need to know about the stock market and stock movement and how to take advantage of those moves without incurring the usual high costs of travel and related expenses usually associated with seminars.
End part 1 of 2
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